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Nice CarLast week in a car showroom of all places I ran into a VC who I hadn’t seen in ten years. He had sat on the board of my last company and we chatted and made small talk as he was admiring a new car.

It was clear that he had no memory of a phone conversation my partner and I have never forgotten.

Big Name CEOIt was the Internet bubble and after almost three years our startup had found a business model and we were scaling revenue and headcount fast. Our second round of funding was from a firm and VC whose names were household words. This partner lived up to his reputation and helped us hire an experienced, world-class CEO from a large consulting company that we thought would be the guy to take our company to a billion dollars (think Internet-bubble Kool-aid.)

The legendary VC was too busy to sit on our board, so we got another younger partner in his firm with seemingly the right pedigree – engineering degree, MBA, lots of boards, etc. But as we would find out the hard way – zero experience as an entrepreneur.

Now that the big name CEO had tentatively accepted our job offer we were having a board meeting via conference call to approve his compensation package. My co-founder and I gulped as we went through each part of the package; the equity we were offering would make him an equal founder, and his salary, while a huge cut for him was a lot more than the starvation budget we had put ourselves on. However, the new CEO was as hungry to join a hot Internet startup and work with legendary VC and not miss the bubble, as we were in hiring him. We thought he’d be worth it. A point the young VC on our board kept reminding us of.

You’re Just the Founders
When the call was almost over my partner and I mentioned, “We want to remind you guys that we’ve been working at founders pay for almost three years. We’d like to adjust our salaries to reflect the new pay scale.” We had hoped for parity with the new CEO, but any offer of some kind of raise would have made us feel good. Instead, what we got from the VC, was “Who the hell do you think you guys are. You’re just the founders.” Then he proceeded to give us a lecture of why we should consider ourselves lucky to get this new guy, he and his firm were the ones that were going to do the heavy lifting and we should be happy that we were going to make our money on the stock, etc.

Never ForgetWe never did get a raise. Luckily the company did go public, but I’ve never forgot the conversation.

For the last 12 years as friends and then students have asked me about how to approach this big name venture firm, I’ve managed to steer them to other venture firms in the valley – by suggesting that there were firms who would treat them like they mattered. I’ve averaged about 6 referrals a year.

I figure when I get to 100 I’m even.

Lessons Learned

“Founder-friendly VCs” do exist.

Having a VC who has been an entrepreneur is a plus, but it’s attitude that matters.

If you’re a founder, ask for a pay-parity agreement with a new CEO upfront and in writing.

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44 Responses

Steve, skip this notion that you will ever get even. With the time value of money, hitting the big time today doesn’t cover the opportunity costs driven by money you didn’t get back then.

Look for the good. Yes, bad is out there, back there, and just outside this room, but ignore that. Focusing on the good and your brain will deliver good. You can’t escape it by thinking about it. Your brain won’t let you, because it brings what you think about into your reality.

I don’t know about that David. The world will be a crappy place if you let rude people act like jerks without some form of retribution. That’s why I think that http://www.dirtyphonebook.com is actually a powerful weapon for good in the long run. In some ways, maybe it’s damaging to hold a grudge over the long run, but what’s worse is letting rude people get away with being rude with no consequences. Steve is 100% correct to subtly steer profit-making opportunities in the other direction if that makes him feel better.

Its amazing that after so long you still have such pain about it, and its understood…. you are the company, you built it with your customer and it is so wrong to treat you like this.

I am so happy that the company was successful after all and you got your pay… Imagine that the company was not public… I wonder if Steve Black of today would have been the guy who inspire startups to succeed and adopt customer development plan 🙂

Thanks for this lession, and maybe i should also ask for a referral, so I wont get in touch with this VC 🙂

I’ve been an entrepreneur for 10 years and reading this made my skin crawl. I’ve observed that everyone wants to be appreciated. Founders who pour their heart and soul into creating something are no exception. No matter how high the IQ of that board member was, he was missing the critical emotional skills that are so often the differentiator in business.

It’s easy to find. The company he’s referring to is right in his bio: Epiphany. The information about the CEO and investors of EPNY is publicly available in many places, including the S-1 filing at the SEC. See http://bit.ly/asosIl

I am currently reading your book The Four Steps to the Epiphany. I like it so far and will introduce the book on my site. I have written a lot on parenting, Chinese parenting, good or bad. See my posting on 5/20/2010 regarding Asian parenting and their success beyond college or rather lack of success.
Thanks

This post is so totally 100% right on the money. The number of vc’s who’ve actuallyl made(or missed) a payroll, sold stuff, or microwaved pizza at 3am amid a client problem is tiny. Wharton’s a lovely place, but isn’t “teaching entrepreneurship” something of a total oxymoron unless(as steve does) it’s taught by the guy who lived the movie rather than read in in HBR.

Spreadsheets are nice. They’re not reality. Reality is getting the customer to prepay because your checkbook is empty…without the customer knowing!

I’ve been a blank acolyte since E.piphany had five employees(back when dinosaurs roamed). This may be the best of his zillion prolific posts to date.

Steve, as always a great post. Thanks. Years ago when I was thinking of joining a start up where the CEO was an ass, I was given this advice; “Des, don’t ever work for someone unless he/she is someone you would enjoy having over to your house for dinner on a regular basis.”

I suggest the same criteria be used when selecting a VC. There are many VCs I’d love to have over to my house for dinner; but there are many I’d not want to sit with for any period of time.

Not all founders can be great CEOs. But they are the lifeblood of the company, the keepers of the flame, and if you take them out or marginalize them, you’re left with a model and a team of people showing up for a job, not emotionally invested in a dream.

Founders–you’re at a disadvantage because you don’t know what you don’t know. Here’s a quick tip–you’re possibly smarter than most of the VPs or CEOs your VCs would bring on. What you lack is the resume, but a lot of people with great resumes lack conviction, drive, integrity, passion, etc. Some of them can fake it.

It’s MUCH better to figure things out for yourselves, and take your time on hiring senior management.

Once you start the company, you are an employee and if the company can pay you–INSIST on standard pay. You should have incentive options as well–starting the company, launching it, innovating–that’s what the founding stock is about.

I really hate when founders are deliberated marginalized and discriminated against by VCs and the supporting industries around VC.

Oh wow, I’m TERRIBLY sorry. E.phiphany. I was thinking Epinions. Good, you’re smarter than those knuckleheads. You actually did something great, and you were wise going into it. Sorry for the awful confusion.

Still. who cares about how much the CEO made, or how big of a douche the VCs were. Most “pros” are that way. Over the course of funding our networking start-up (post bubble…ouch) building team and building product, EVERYONE knew what a “distraction” funding is, because almost all the VCs you talk to are fully retarded. Distraction. ha.

But in the end, you’re not looking for their advice. You’re looking for their money and connections. You know what to do.

So maybe rethink your antimony towards dickish VCs. Who cares if you pass a deal to that guy? Who cares if he gets richer, if it means your friends got funding and get their win, too? I’m not saying he’s your first choice, but better than nothing, right?

I would have thrown up in that call. “Just the founders”??? It’s baffling how intelligent people allow money to warp their perspective. I think the founders are to a company as an F1 pilot is to a Manufacturer

You may not rely on the pilot to define features and launch strategy for a commercial car, but thanks to him, the technology that is making that car unique was proven early on in a way no one else could replicate.

Steve,
Long time since OTS prior to EPNY – great insight into the mindset of some investors. I wonder if the decade since the dot-com mania peaked has brought VCs and founders goals into closer alignment? Your experience underscores why I’m trying to live on founder’s pay while avoiding VCs.
Edward Schreyer

My company had a good run during the dot-com era, but we were established beforehand and self-funded during. We bought a tanking data-capture software company, got an OEM deal with SSA Global, and hauled it out of a deep hole. That’s when we brought in a guy who was supposed to turn our modest success into a big one. Instead, he was a one-man wrecking crew.

I can only wish that I had known then about The Gabriel Institute, which has created a completely new way to predict how a person will behave when working with others to benefit their group, overcome a challenge, or achieve a common goal.

Unlike the ubiquitous personality tests designed (in the 1940’s & 50’s) to measure individual characteristics or traits, TGI Role-Based Assessment (RBA), was designed from its very beginnings to measure ‘teaming characteristics’. It is used for hiring & promoting, works extremely well in matching people to the functional mission of their team, and is also effective in analyzing and solving team performance problems.

Point well made, but there’s always going to be obstacles and disagreements of all kinds. Isn’t it you who should judge that VC has an ill-formed point-of-view and move on? A good level self-belief should have already warned you that some ceo/consultant is not going to be an indispensable savior after you’ve built a very neat product with your own hands.

We’re a venture capital fund that likes to work closely with founders and give them coaching and support, as well as assistance in building mature senior management teams.

As minority investors, we view our job as making impact on the company’s exit by doing everything we can to help the founders build a large, profitable, software company, and disagreement is often the starting point for collaboration.

You are wise to continue to steer founders away from the big name VC. There are many ways to communicate between board members and founders. This particular choice was a poor one and made clear how at least this partner viewed founders.

Sure struggling and getting next to nothing is par for the course for founders when starting out but as the business grows so should founder salaries. Starving founders don’t make sharp decisions 3-4 years into a businesses growth cycle.

This might be a slightly different take on your story. This VC said what he thought. Clearly, he should have kept it to himself but narcissism is a hazard of their profession. Until this post reaches his attention, your former VC has no idea that you would never work with him (or his firm) again. I am aware of several analogous situations. Strangely enough, VCs often think it is a black mark against an entrepreneur if he or she can’t get his or her former financial backer to invest in their next venture. This opinion is expressed by a number of bloggers in passing when commenting on financing issues (I can’t remember for sure, but look at blog posts by Suster and Wilson). In the case of serial entrepreneurs who have delivered good exits, however, the reverse is the case, although, I don’t believe that any VC would actually admit it. There are precious few of these, and VCs love to fund them. So, they buy into the idea that it is a bad signal if the entrepreneur does not return to her source. Needless to say it is human nature not to recognize that their own behavior contributed to the situation.

While what he said is true, he clearly was not a people person. You were just the founders at that point. It’s definitely a tough decision to bring someone on and fork out all that money while you’ve spent 3 years eating ramen. Glad it worked out for you.

VC’s are weird sorts for sure, and if he said those inflammatory words, then he’s insensitive and a social moron.

That said, if you felt you deserved a higher salary, you should have asked before they invested and signed on to a particular cash burn. To ask after the fact is disingenuous and unprofessional. It would strike me that you are trying to take advantage of the CEO’s hiring.

Stephen, I can see your perspective and would have agreed with you but for the following …

As founders – people make a lot of sacrifices along the way. Low salaries – or as low as they can afford to keep them is one of them- especially when there is no bench mark. And all a founder can do is to make do with as less he or she can.

It is on the strengths of this mindset that a company gets to a point – as steven’s did – where they can hire highly paid CEOs.
And if at that point , when one gets a bench mark , one want to recalibrate , what is wrong with that? And please spare us the “disingenuous” sermon. Let us not pretend to be virgins in a brothel.

Further, every one has a right to ask for what they believe is fair.

Every one has a role in the eco system, what is important is the engaging entities should be realistic when dealing with each other , no one is perfect, least of all the VCs and founders – you need to be a little bit off the median to be either – so let’s remember that and talk with the other person’s perspective in mind.

JUST the founders .. if indeed it was said in *that* tone – and steven I am not saying that that was not the case , sometimes our ears deceive us – especially when we hear such comments – anyways, that statement was totally uncalled for.

Another thought is that there are so many different paths on which the same discussion may have happened. It did not, seems to me it was the culmination of things that were brewing in your relationship with that VC. Nothing comes out of the blue, everything has a history.